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THE SUPREME COURT OF NEW HAMPSHIRE

___________________________

Hillsborough-northern judicial district

No. 96-119

HILCO, INC. AND DIVERSIFIED FINANCIAL SYSTEMS,
INC.

v.

HALSTON O. LENENTINE AND JANET M. LENENTINE

August 14, 1997

Roberts & Cohen, P.A., of Portsmouth (Sanford
Roberts on the brief and orally), for the plaintiffs.

Normandin, Cheney & O'Neil, of Laconia
(Duncan J. Farmer on the brief and orally), for the
defendants.

THAYER, J. The defendants, Halston and Janet
Lenentine, appeal the Superior Court's (Groff, J.) order
subordinating their mortgage to the mortgages held by the
plaintiffs, Hilco, Inc. (Hilco) and Diversified Financial
Systems, Inc. (Diversified). We reverse and remand.

The trial court found the following facts. In May
1985, Halston Lenentine entered into an agreement to sell certain
real estate in Tilton to Ronald C. Mizner. Mizner obtained
financing from the Lenentines and a guaranteed loan from the
Small Business Administration. After closing, Meredith Bank and
Trust Company (Meredith Bank) recorded a first mortgage for
$135,000 on the Tilton property. The Lenentines recorded a second
mortgage for the amount of $37,000 on the property. Although the
Lenentines' mortgage had not been executed at the time of the
closing on Meredith Bank's first mortgage, the bank was aware
that the Lenentines' mortgage would be executed and would assume
a position of second in priority.

Mizner also secured the financing of his real
estate purchase by mortgaging property he owned in Meredith.
Specifically, Meredith Bank took a third mortgage and the
Lenentines took a fourth mortgage on Mizner's Meredith property.
Laconia Federal Savings and Loan Association (Laconia Federal)
and Plymouth Guarantee Savings Bank (Plymouth Bank) had been
previously granted two other mortgages on the Meredith property.

Mizner defaulted on the Lenentine note after
making nine payments. In November 1988, the Small Business
Administration foreclosed on Mizner's Tilton property, resulting
in a deficit. Mizner then restructured Meredith Bank's mortgage
resulting in the payment and discharge of the mortgages held by
Laconia Federal and Plymouth Bank, the discharge of Meredith
Bank's mortgage, and a settlement with the Small Business
Administration. Two new mortgages, given to Meredith Bank in the
amounts of $67,500 and $63,092.85, were recorded in replacement
of the three discharged mortgages. As a result of the negligence
of the bank's counsel, the Lenentines' mortgage was not
discovered.

In November 1990, Meredith Bank's successor,
First Central Bank, restructured the $67,500 mortgage and
advanced additional funds so that the mortgage was now for
$80,000. In addition, First Central Bank's two existing mortgages
were discharged, and two different mortgages were recorded in
their place -- one for $80,000 and the other for $58,729.32.
Again, the Lenentines' mortgage was not discovered.

First Central Bank's successor, First NH Bank,
assigned the $80,000 mortgage to Hilco and sold the $58,729.32
mortgage to Diversified. The Meredith property, appraised at
$87,000, was eventually foreclosed on and sold for $68,500. At
that time the defendants' mortgage apparently had been
discovered, and the parties agreed that the Lenentines would
receive $20,000 of the proceeds, leaving the balance of the
proceeds in dispute.

The plaintiffs brought a petition for declaratory
judgment to determine the priority of the mortgages on the
Meredith property in order to disburse the balance of the sale's
proceeds. The superior court found that the mortgages were
discharged under circumstances entitling the plaintiffs to
equitable relief in order to restore the original mortgages with
their original positions of priority, reasoning that had the
parties been aware of the Lenentines' mortgage, the restructuring
would not have occurred without an agreement from the Lenentines
to subordinate their mortgage. The court opined that the
plaintiffs should be entitled to rely on their counsel's title
search which did not uncover the Lenentines' mortgage. The
superior court determined that Hilco and Diversified were
equitably subrogated to Meredith Bank's position under the
original mortgage, a position of priority over the Lenentines'
mortgage. As such, the court ruled, the Lenentines have no claim
to the remaining disputed proceeds of the foreclosure sale.

The Lenentines appealed, arguing that the
superior court erred in applying equitable principles to restore
the original mortgages held by Meredith Bank to their position of
priority. In response, the plaintiffs contend that the principles
underlying our race-notice recording system support the trial
court's order, and that equitable intervention is appropriate in
this case.

The propriety of granting equitable relief rests
within the sound discretion of the trial court and will not be
disturbed absent an abuse of that discretion. Decker v. Decker,
139 N.H. 588, 590, 660 A.2d 1112, 1114 (1995).

In deciding the relative positions of the
parties, the trial court relied on the principle that
"[w]hen a new mortgage is substituted in ignorance of an
intervening lien, the mortgage released through mistake may be
restored in equity and given its original priority as a
lien." Caron v. Association, 90 N.H. 560, 564, 10
A.2d 668, 670-71 (1940) (quotation omitted); seealso
55 Am. Jur. 2d Mortgages §§ 470, 477 (1996). Before the
first restructuring of the Meredith Bank mortgage, the
Lenentine's mortgage was fourth in priority. When the three
mortgages of higher priority were discharged, the Lenentines'
mortgage became first in line, "[u]nless, for some adequate
reason, equity does not follow the law in this instance." Caron,
90 N.H. at 562, 10 A.2d at 669.

The plaintiffs invoke equity to relieve them from
the result that would follow from the established order of
priority as dictated by our recording system. We must guard the
integrity and reliability of our recording system, viewing claims
to circumvent the established order of priority, through resort
to equity, with trepidation. Our recording statutes serve an
essential purpose, ensuring notice to the public of property
interests, thereby protecting "both those who already have
interests in land and those who would like to acquire such
interests." Amoskeag Bank v. Chagnon, 133 N.H. 11,
14, 572 A.2d 1153, 1155 (1990).

Accordingly, the result in this case will depend
upon the strength of the plaintiffs' case for equitable
intervention, and not upon any supposed weakness of the
Lenentines' equitable position. SeeCaron, 90 N.H.
at 562, 10 A.2d at 670. Ignorance and deceit are factors that in
some circumstances we have recognized as weighing the equities in
favor of restoring a previously discharged mortgage. Seeid.
at 564, 10 A.2d at 671. The plaintiffs do not allege deceit, and
excusable ignorance is not present here. The plaintiffs had
constructive notice of the Lenentines' recorded mortgage, cf.
id. at 565, 10 A.2d at 671, and we hold that the trial
court abused its discretion when it allowed the plaintiffs to be
shielded by equity from the consequences of their agent's
negligence in not discovering the Lenentines' mortgage. See
55 Am. Jur. 2d Mortgages § 477; 59 C.J.S. Mortgages
§ 282(c)(2) (1949).

Before concluding our analysis, we address the
plaintiffs' misplaced reliance on Laconia Savings Bank v.
Vittum, 71 N.H. 465, 52 A. 848 (1902), in support of applying
equitable principles to restore the original mortgages. In sum,
the plaintiffs argue that the Lenentines intended their mortgage
to be subject to the original mortgages, and as such, the
Lenentines would not be prejudiced if the plaintiffs' mortgages
took priority over the Lenentines' mortgage. In Caron, a
case decided after Laconia Savings Bank, we explained that
where a party stands upon his or her legal rights to establish
priority, the weakness of his or her equitable position is
irrelevant. SeeCaron, 90 N.H. at 562, 10 A.2d at
669-70. Thus, our inquiry focuses entirely upon the equitable
arguments in favor of the plaintiffs' position; to the
extent that Laconia Savings Bank suggests otherwise, it is
not controlling.

The plaintiffs' remaining arguments regarding the
principles of race-notice and bona fide purchasers are
misdirected. The plaintiffs essentially contend that the
Lenentines are precluded from ascending in priority upon the
discharge of the other mortgages because the Lenentines were
aware of Meredith Bank's prior superior mortgage. This argument
must fail because the time for determining the priorities between
the plaintiffs' new mortgages and the Lenentines' mortgage
occurred when the new mortgages were recorded in place of the
discharged mortgages. The question then is whether the plaintiffs
had notice of the Lenentines' interest, a question which we have
already addressed.